The Mueller Social Security Report Is Flawed

The Mueller Social Security Report Is Flawed

Are
reduced Social Security benefits better for the average retiree
than a personal retirement account? According to a 140-page report
published by economist John Mueller of Lehrman Bell Mueller Cannon,
Inc., in cooperation with the Employee Benefits Research Institute
and Policy Simulation Group, the answer is "yes." Unfortunately,
the Mueller report's conclusions are based on faulty assumptions
and contrived scenarios.

The
Mueller report, which was commissioned by the National Committee to
Preserve Social Security and Medicare, an advocacy group on
retirement and senior citizens issues, has many flaws, including
unrealistic assumptions about long-term stock market investments,
an unsupportable adjustment for investment risk, and a contrived
way to pay for the transition to a Social Security system featuring
personal retirement accounts. For example:

The report
assumes that virtually every other economist has been wrong about
the stock market.
For 200 years, economists have held that supply and demand
determine earnings on investments in stocks. People will invest in
stocks only so long as the amount they earn from that investment is
more attractive than the alternatives. When it is not, they invest
in something else or spend the money they would have invested.
Since 1900, investors have demanded and received earnings from
stocks that average 7 percent per year after inflation. Studies by
both the Social Security Administration (SSA) and the bipartisan
Advisory Council on Social Security project that stocks will
continue to earn an average of 7 percent annually. Mueller
characterizes these studies as "deeply flawed" and "seriously
misleading" despite findings by the Office of Management and Budget
and the Congressional Budget Office that also project an annual
return of 7 percent.

Mueller insists long-term earnings from
stocks are determined by the economy's overall growth rate. Because
the economy is predicted to grow more slowly in the future, Mueller
maintains that stocks will earn only 4.7 percent after inflation.
But this outcome would require a sudden and fundamental change in
investors' behavior. After a century of demanding a 7 percent
average annual return from stocks, Mueller predicts Americans will
settle for a 4.7 percent return. This assumption, of course,
drastically reduces the expected returns from personal retirement
accounts.

The report
makes an unsupported adjustment for risk.Mueller uses a curious measurement of investment risk to reduce
the expected average earnings of both stocks and Social Security
benefits. Even though the SSA reports it will have enough revenue
in 2032 to pay only 72 percent of the benefits it has promised
(making Social Security a highly risky "investment" by any
standard), Mueller states that investing in stocks is almost five
times more risky than Social Security, so he reduces his
already low projection of earnings from stocks by another 2.9
percent while reducing those from Social Security by only 0.6
percent.

Risk is an important concern, and it is
legitimate to include an adjustment. But Mueller's is excessive.
Although stocks are volatile over short-term periods, Professor
Jeremy Siegel of the Wharton School of Business at the University
of Pennsylvania finds that over a 20-year period, stocks are no
more risky than treasury bonds (the equivalent of Social Security
Trust Fund reserves). Moreover, a study by Ibbotson Associates
finds that stocks have gone up in value in every possible 20-year
period between 1926 and 1998 that it examined (there were 54 such
periods). Investments for retirement usually are held for more than
20 years.

The report
selects an unreasonable transition plan.The Mueller report also overstates the transition costs of
moving to a system of personal retirement accounts. It ignores many
of the proposed plans and instead uses a contrived example that is
unrealistic and improbable. Initially, Mueller's chosen transition
plan would raise Social Security taxes temporarily by 20 percent,
with the additional money going into personal accounts. Only a few
of the nearly 30 plans that call for personal retirement accounts
include such a provision. In later years, Mueller assumes
transition costs would be funded on a pay-as-you-go basis from
Social Security revenues. In other words, annual Social Security
taxes would have to be high enough to pay for personal retirement
accounts and all benefits promised under the current system.
Mueller also does not consider recent plans that call for using
most of the overall budget surplus to preserve Social
Security.

Mueller assumes that the entire transition
cost would be paid in one generation, instead of two or more as
called for in most serious reform plans. Responsible transition
plans consider it unfair to force one generation to fund both its
own retirement benefits and those of the previous generation.
Hence, reformers generally propose that paying off Social
Security's large unfunded liability should be spread over many
years through bonds paid for by the following generation. Although
this method would lengthen the transition time, it also would
reduce the burden on the first generation.

MUELLER'S PLAN:
CUT SOCIAL SECURITY BENIFITS

Instead of creating private accounts,
Mueller's solution to Social Security's problems is a 20 percent
reduction in retirement benefits and Social Security taxes. Mueller
claims this approach is superior because

if
the economy turns out to be better than now expected, the
phasing-in of benefit scalebacks can be halted at any time...or
else payroll tax rates could be permanently reduced below current
law.

In
reality, this is the worst solution. With a 20 percent cut in
benefits, millions of lower-income workers who depend on Social
Security for the vast majority of their retirement income would be
left well below the poverty line. Also, even with a tax reduction,
Mueller's estimates show these workers facing an absurdly low rate
of return--less than 1.0 percent in some scenarios.

Over
the past 60 years, Social Security has played a major role in
reducing poverty in the elderly. Mueller's plan would reverse this
trend, throwing millions of workers into poverty. Congressional
decisions about the future of Social Security should be based on
sound research and serious consideration of how each recommendation
would affect working Americans. Unfortunately, the Mueller plan
fails this test.

Gareth G. Davis is a
former Policy Analyst in The Center for Data Analysis and David C.
John is Senior Policy Analyst for Social Security at The
Heritage Foundation.